Getting Started on Wealth Accumulation

Here’s a great read from Huffington Post about personal finance which introduces various topics relevant to the second stage of personal financial planning, which is wealth accumulation.  I’m not going to discuss all of the points, just the ones which I feel strongly about.

#10. I’d rather have Php 2.00 tomorrow than Php 1.00 today.  Building wealth requires personal sacrifice and delaying gratification.  While you’re still young and able, you have to start thinking about the future because time is one of your best allies in wealth accumulation.  Look at this annuity table, with a monthly investment of P2,000, P3,000, and P5,000 based on a compounded eight percent annual return.

Monthly investment 10 years 20 years 30 years
2,000 (Php365,892.07) (Php1,185,894.44) (Php3,000,590.36)
3,000 (Php548,838.11) (Php1,778,841.66) (Php4,500,885.53)
5,000 (Php914,730.18) (Php2,964,736.09) (Php7,501,475.89)

This tells you two things.  You can start small, with just a monthly savings of Php2,000 but if you persistently invest it in a financial instrument that generates eight percent return annually, you will be a millionaire in twenty years!  That million can be used to start your own business which would further add to your income stream.  The second thing this table shows you is just how important time is to an investor.  Even if you only invested Php2,000 for thirty years (equal to Php720,000), the return is much bigger compared to the future value of the Php5,000 monthly investment for twenty years (equal to Php 1.2 million).   Of course, Php5,000 monthly investment for 30 years beats Php2,000.  The point is, if you don’t have the financial capital, you have to make up for it with time and if even you had the money but had little time, the growth will be limited.  It’s not hard to save Php2,000 monthly right?  This is just the same as saving Php 67 every day, less than what a one piece Chickenjoy would cost.

If you do decide to start this habit, it’s going to be difficult at the beginning.  Why? Because this takes time and constantly requires you to be disciplined and be focused on your goal.  After all, it’s so easy to think of P2,000 as dispensable money, one you can always save up for month after month. No question about that. But the thing is, it’s not the money that we might run out of, it’s time.

#9. Millionaires typically don’t drive Lamborghinis and Aston Martin.   This is the myth that the book The Millionaire Next Door has debunked. Despite billions in their bank accounts, some of the world’s richest are also the most frugal men alive. Warren Buffett continues to live in the same house he bought in 1958. Ikea’s founder Ingvar Kamprad flies coach not first class and drives a 1993 car model. If you want to be financially free, it’s important to keep whatever money you make. Don’t spend it on things that depreciate in value.   Simplify your lifestyle by living below your means.  Looking rich is different from being rich.  If they can do it, why can’t we?

#8. It’s Okay to Splurge on Something Nice…at the Right Time. The key is balance. You can’t just live today like there’s no tomorrow when there actually is, and you also must not forego living in the present. This is one of the principles behind T. Harv Eker’s jar system of money management.  You need to have play money to pamper and treat yourself.  Don’t be too stingy on yourself because the time will come when you will feel too deprived, that it will push you to spend big time, which is what we’re trying to avoid.  Splurge if you must, but it must be planned.  Save up for it.  Make it count. Don’t just buy impulsively.

#7. Forget Nuclear…Compound Interest is the Most Powerful Force in the Universe.  Einstein once said that compound interest is the eighth wonder of the world. He was right. It is such as powerful force, which when combined with time, allows your investments grow at an exponential rate. So what is compounding? It is interest earning on interest.

Let’s go back to the example in the article: Which would you rather have: Php 1,000 every day for a month or Php 0.01 doubled every day for a month?  This is the table we get.  The first choice provides a constant return every day.  This is wealth building by addition and what you would get if you were to put your money in assets that only give you simple interest and does not compound. With the second, you start with a measly one centavo but because it doubles, it increases sharply.  This is wealth building by compounding, where interest is reinvested to produce higher earnings in the succeeding days, giving you an exponential growth. If you look at the table, you’ll notice that it was only on the twenty third day that compounding surpassed the linear growth from saving, but after that, it increased by leaps and bounds.  That’s why we need time.  Like a tree which takes years to grow and bear fruit, because it roots itself first to the ground, your wealth accumulates at a snail-like pace in the first few years, but once it reaches a certain point, it multiplies.

Day A B
1        1,000.00                          0.01
2        2,000.00                          0.02
3        3,000.00                          0.04
4        4,000.00                          0.08
5        5,000.00                          0.02
6        6,000.00                          0.32
7        7,000.00                          0.64
8        8,000.00                          1.28
9        9,000.00                          2.56
10      10,000.00                          5.12
11      11,000.00                        10.24
12      12,000.00                        20.48
13      13,000.00                        40.96
14      14,000.00                        81.92
15      15,000.00                      163.84
16      16,000.00                      327.68
17      17,000.00                      655.36
18      18,000.00                  1,310.72
19      19,000.00                  2,621.44
20      20,000.00                  5,242.88
21      21,000.00                10,485.76
22      22,000.00                20,971.52
23      23,000.00                41,943.04
24      24,000.00                83,886.08
25      25,000.00            167,772.16
26      26,000.00            335,544.32
27      27,000.00            671,088.64
28      28,000.00          1,342,177.28
29      29,000.00          2,684,354.56
30      30,000.00          5,368,709.12
31      31,000.00      10,737,418.24

#1. It’s not about the money.  It’s about freedom.  This says it all. Why do we want to be financially free? To live the life we want!  The definition of freedom is different for everybody. For some it might be living a life where they can buy anything, go anywhere, and do whatever they want. For some, it’s about being their own bosses and the ability to have more control over their lives.  For some, it’s about giving back to those who have less.  Because financial success and freedom is different for everyone, you have to define it for yourself. But before you can be free, you have to work hard first to have enough money which will work hard for you.  To be financially free, you don’t need a lot of money or to be massively wealthy.  You just need to accumulate enough assets that provide enough passive income to cover your living expenses.

2 thoughts on “Getting Started on Wealth Accumulation”

  1. #10 is over simplistic which makes the whole thing wrong. If one requires 50php a day, would they want to see the 50php today or a 100php tomorrow? Of course they’d go for the former, otherwise, they won’t even make it to see their 50 today become a 100. The point is, the article should have emphasized that we should use our DISPOSABLE income wisely (as opposed to just casually stating disposable income without even explaining it).

    #9 started should’ve been removed in favor of #8. There is nothing wrong driving an expensive car. In fact, some cars are so awesome that their value appreciate to the point that they make better investment vehicle than any mutual fund.

    Compounding is over rated. A lot of agents tell us to place our money on some vehicle like a mutual fund and it magically grows. No explanation on fluctuations and even risk of loss.

    #1 is the only part the makes sense.

    The point is, the article has great points. However, it only points out the good parts. However, it never mentions the dark side of it. Making the whole article really bad and a form of misinformation. It is the same as prescribing someone with a drug that cures a disease without mentioning the side effects. Please write a more balanced article and avoid misinforming people.

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    1. Hi reader101, thanks for your comment. I appreciate your feedback about being balanced and I will keep that in mind, especially when I’m writing about products. When I wrote this article, I only intended to use it as an introduction to wealth accumulation (the succeeding article to risk management as the second step to personal financial planning). At this point, I just wanted to introduce the concept of time value of money and compounding and reinforce the need to have financial freedom as one’s goal. That’s why there’s no mention of risk,financial instruments, and products here. If you’re referring to the Sunlife Dynamic Fund article, since you have mentioned mutual fund multiple times, yes I might have dwelled on the benefits and returns, but I also talked about risk. It’s been simplified because I wanted to show how you can take baby steps towards financial freedom, that a million pesos begin with piso.
      # 10 At this point, I was explicitly referring to savings and delaying gratification, which assumes that you have already covered your living expenses. I don’t think this is a far-off assumption, since anybody who has ever worked knows that savings is left after expenses have been deducted from income. On the other hand, your comment is based on the premise of survivability and meeting one’s basic needs, so we are on a different ground here. I never said you had to starve yourself.
      #9 Here, I was stressing the importance of frugality – that you don’t need to upgrade your lifestyle to match your income or net worth. Otherwise, nothing is left and you’re back to square one. My point was, don’t be an accumulator of things which depreciate in value. If you treat luxury cars as investments because their value appreciates, then are we not on the same page?
      #7 I also don’t think compounding is overrated. That is the premise of value investing, which is what Warren Buffett is known for. Granted,we’re not like Warren and that’s why the next best thing is to either invest in blue chips or get a mutual fund which is professionally managed. Risk is inherent in every business. If you were to open shop, there’s no guarantee that you’ll make money everyday, at some days you lose or breakeven.
      Before I became a financial advisor, I have opened several UITFs/ mutual fund accounts and each one of them talked about risks and asked me to complete a questionnaire to assess our risk appetite. It’s unfortunate that you dealt with agents who didn’t disclose everything but you appear to have generalized that all agents are like that, which also isn’t fair.

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